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Capital One (COF) Down 3.7% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Capital One (COF). Shares have lost about 3.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Capital One due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Results benefited from rise in net interest income, improving loan balances and strength in card business. However, a rise in provision for credit losses, lower non-interest income and higher operating expenses were the undermining factors.

After taking into consideration non-recurring items, net income available to common shareholders was $1.53 billion or $3.24 per share, down from $1.81 billion or $3.71 per share in the prior-year quarter.

Revenues Down, Expenses Rise

Net revenues were $7.12 billion, down 1% year over year. However, the figure beat the Zacks Consensus Estimate of $7.00 billion.

However, allowance as a percentage of reported loans held for investment was 2.92%, down 20 bps.

Profitability Ratios Decline, Capital Ratios Improve

Return on average assets was 1.74% at the end of the reported quarter, down from 2.11% in the year-ago quarter. Also, return on average common equity was 12.14%, down from 16.06% in the prior-year quarter.

As of Jun 30, 2019, Tier 1 risk-based capital ratio was 13.8%, up from 12.6% in the prior-year quarter end. Further, common equity Tier 1 capital ratio under Basel III Standardized Approach was 12.3% as of Jun 30, 2019, up from 11.1% on Jun 30, 2018.

Outlook

Management expects the impact of onboarding of the acquisition of Walmart’s co-branded and private label credit card receivables to be a modest benefit to NCO rate of domestic card business.

Operating efficiency ratio (net of adjustments) is expected to improve modestly in 2019 and 2020, excluding the one-time Walmart launch and integration expenses. In 2021, the same is expected to improve to 42%, driven by the data center exit, continuing technology innovation and Walmart launch.

The company expects further increases in average deposit interest rate going forward as product mix shift continues. Also, increasing competition for deposits will put upward pressure on deposit rates. The company expects increasing deposit costs and flatter yield curve to be headwinds for net interest margin.

With the momentum in domestic cards and retail deposits, management expects marketing costs for 2019 to be modestly high year over year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Capital One has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Capital One has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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